Week 4: Distance

Answer 1

Liability of Foreignness (LOF)

MNEs at a disadvantage to local competitors in a host country

Costs of doing business abroad, non-local status (Hymer,1976)

LOF the fundamental assumption driving theories of MNEs (Internalization theory, OLI Paradigm, Uppsala model)

To overcome LoF, MNEs need FSA in subsidiaries

Disadvantages to operating in a foreign market due to (Zaheer,1995):

1) Spatial distance (travel, transportation & coordination costs)

2) Unfamiliarity with the host country (adaptation & learning costs)

3) A lack of legitimacy,( (economic) nationalism by local stakeholders)

4) Home-country restrictions on host-country activities increase the costs of doing business

Question 2

How to Reduce LOF?

Answer 2

Isomorphism Strategy

mediates the relationship between: distance & performance
- regulatory distance
- economic distance disappears,

cultural distance - remains

Question 3

Distance =

Answer 3

Distance
= In IB, the extent of differences between country pairs.

assumption: differences prevent or disturb the information flows between firms & markets

distance introduces friction & complexity to cross-border activities and increase challenges

Question 4

INSTITUTIONAL DISTANCE

Answer 4

Factors that reduce Institutional/administrative distance:
o Common history and political ties
o Preferential trade agreements
o Common currency
o Political union(s)

Factors that increase distance
o Barriers to trade
o Institutional infrastructure

Question 5

Cultural Distance: Hofstede

Answer 5

1) INDIVIDUALISM vs COLLECTIVISM
- the degree to which individuals are integrated into groups.

2) POWER DISTANCE (PDI)
- the extent to which the less powerful members of org. and institutions accept/expect that power is distributed unequally.

3) UNCERTAINTY AVOIDANCE (UAI)
- deals with a society’s tolerance for uncertainty and ambiguity.

4) MAS vs femininity
- refers to the distribution of roles between the genders.

5) LONG TERM ORIENTATION (LTO):
- related to the notion of time.

Question 6

Weaknesses of Cultural Distance (Shenkar, 2001)

Answer 6

1) The illusion of symmetry:

The CD measure implicitly assumes that the CD between country A and B is similar to the distance between country B and A.
But, easier for Chinese firms to invest in the USA, then vice versa.

2. The illusion of stability:

As CD is measured at a single point in time, the CD is assumed to be constant over time.
But: cultures change, and firms may gain experience, so role of CD changes over time

3. The illusion of linearity:

only one measure of CD for explaining location of MNE activity, the entry mode chosen and the subsequent success of these foreign activities is that CD affects all these different phenomena in a linear way.
But: the effect of CD may depend on a firm’s learning curve and hence is not linear.

4. The illusion of causality:

Distance is a multidimensional construct and should be studied not in isolation but together with geographic distance, institutional distance.

5) The illusion of discordance:

The assumption is that all aspects of the cultural distance between home and host countries matter equally.
But some dimensions matter more than other depending on the phenomenon studied. All cultural dimensions are seen as substitutes for each other, but some dimensions may be complementary.

6. The assumption of corporate homogeneity:

By using national cultural measures, the CD concept only incorporates variance at the national cultural level and assumes a lack of variance at the corporate level.
But this is not complete. National culture vs org. culture.

7. The assumption of spatial homogeneity:

By calculating CD on the basis of national level sores, potential intra-country variation is excluded. Also, a firm’s exact location in a country is not measured, excluding potential border effects reducing the size of the CD and leading to overestimations of the CD.

Question 7

CAGE FRAMEWORK =

Answer 7

Distance may originate from differences along four dimensions:

1) Cultural Distance
2) Administrative Distance
3) Geographic Distance
4) Economic Distance

Personal experience is not enough to make decisions by managers in a very diverse world

CAGE framework is useful for making key differences more visible in order to select the right targets to enter

critics:
- cooperative entry modes are not discussed (JV, alliance) and how they help to reduce distance

Question 8

CAGE FRAMEWORK

1: Cultural Distance

Answer 8

Cultural Distance
= “A country’s cultural attributes determine how people interact with one another and with companies and institutions”

Sources:
- Language
- Religion
- Ethnic or racial identity
- Shared cultural history
- Norms of behavior

Question 9

CAGE FRAMEWORK

2: Administrative Distance

Answer 9

Sources:
- No colonial ties
- No shared monetary or political association
- No common currency
- no political unions
- Political hostility
- Government policies
* Barriers to trade (e.g. tariffs, taxes)
* No preferential trade agreements

Question 10

CAGE FRAMEWORK

3: Geographic Distance

Answer 10

Geographic Distance

More than just physical proximity
- seperation in space (time)
- natural and man-made separation and connections

sources:
- Physical remoteness
- Lack of common borders
- Lack of sea or river access
- Weak transportation and communication links - Differences in time and climates

Question 11

CAGE FRAMEWORK

4: Economic Distance

Answer 11

Economic Distance

• Differences in consumer incomes
• Difference in costs & quality of:
• Natural resources
• Financial resources
• Human resources
• Infrastructure
• Intermediate inputs
• Information or knowledge

Question 12

Diamond Model Approach (Porter)

general info:

Answer 12

Diamond Model Approach:

!National Competitive Advantage!

–> National prosperity not inherited, but created!

National competitiveness dependent on the ability of its industries to:
- Innovate
- Upgrade

Domestic pressures & challenges create competitive firms!

Individual attributes helpful. But Diamond is however a system.
–> The attributes are reinforcing

The diamond creates an environment that promotes the emergence of clusters of competitive industries.

The diamond is unique to specific industries being studied
- Not possible to identify a national or regional economy diamond

Question 13

Diamond Model Approach (Porter)

Answer 13

1) Factor Endowments
- basic factors: natural resources, climate
- advanced factors: capital, telecom infrastructure, created by individuals & governments

2) Demand conditions
- need sophisticated domestic customers

3) Firm Strategy, Structure and Rivalry
- Different management ideologies (German engineering vs US-short-term profit max.)
- domestic rivalry important for sustaining competitive advantage

4) Related and Support Industries
- presence of internationally competitive suppliers or related industries
- often results in clusters forming

Question 14

Diamond Model Approach (Porter)

Role of Government:

Answer 14

Role of Government =
Controversial
View1: Supporter and helper of industry

View2: Should be left to invisible hand

PORTER:
–> argues both are wrong!

–> Government should be both:
- Catalyst & Challenger
- Transmit & Amplify
the attributes of the diamond.

Governments should seek to:
- Focus on specialized factor creation
- Avoid intervening into factor & currency markets
- Enforce product, safety & environmental standards
- Limit direct cooperation amongst industry rivals
- Promote goals that lead to sustained investment
- Deregulate competition, enforce domestic antitrust policies